Centerra's Atkinson shows the way at Kumtor

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By: Matthew KeevilVANCOUVER2012-11-19

Despite weak earnings due to a seven-week shutdown at its flagship Kumtor gold mine, 60 km south of the Chinese border in the Kyrgyz Republic, Toronto-based Centerra Gold (CG-T) has two big reasons to celebrate its third-quarter results: it has finalized a plan to expand open-pit operations, and boosted Kumtor’s in-pit gold reserves.

Centerra reported a net loss of US$47 million during the quarter, including US$19 million in abnormal mining costs associated with pre-stripping and de-icing a portion of its pit. According to president and CEO Ian Atkinson, the company decided in March that it would move around 50 million tonnes of ice to assure safe mining conditions, and as an upswing, be able to look at pit expansion.

Consolidated gold production for the quarter was lower at 42,700 oz. gold at a cash cost of US$1,400 per oz., owing to the mine plan revision and associated operational delays. As a result, Centerra has dropped its annual production guidance for Kumtor to around 420,000 oz. gold from 460,000 oz. gold.

Production was hit by a second operational setback in October. Centerra had expected to access full ore by September and generate cash flow from Kumtor by October, though inconsistencies in till interfacing caused operational delays.

“There were issues with ice movement in the northeast wall, though we got down on schedule. In this part of the pit, it is ore that we hadn’t exposed before, and part of it is ounces we added during drilling last year,” Atkinson comments during an interview, explaining that Centerra was resource drilling from surface at 40- to 60-metre spacing. “It is a glacial region, and due to the undulations, it can be fairly irregular, so in order to get a more solid prediction we would have needed a much higher drilling density.”

Atkinson points out that the company is operating under normal conditions on the bedrock, and can rely on a model it has used over the past five years at its SB zone to assure reliable mill feed.

After drilling, Centerra increased total open-pit reserves by 58% to 93 million tonnes grading 3.3 grams gold per tonne for 9.7 million contained oz. gold. The added ounces extend Kumtor’s life by roughly five years, and when combined with a higher gold price, allow Centerra to seriouly ponder a super pit.

“It is really a combination of a rising gold price and that exploration program that has allowed us to move to the full open-pit model and away from the hybrid idea, where we were going underground,” Atkinson says, commenting on how variables have changed since developmental decisions were made at Kumtor six years ago. “We’ve expanded the SB zone significantly, and have that much bigger resource. When you combine that with the rise in gold prices, it changes the direction quite a bit.”

Under Centerra’s expanded life-of-mine pit analysis, Kumtor has a 14-year life and would average 650,000 oz. gold production per year. The company estimates “all-in” costs — including revenue-based taxes payable to the Kyrgyz government — at US$917 per oz. gold.

A mill expansion is planned in 2016 that would see throughput levels jump 18% to 18,400 tonnes per day.

Expansion capital would total US$169 million, with sustaining capital clocking in at US$557 million and pre-stripping capital totalling US$1.7 billion.

The plan carries a net present value of US$1.9 billion at an 8% discount rate, and would generate US$3.5 billion in free cash flow over the mine’s life.

Centerra has to swallow US$190 million in committed underground spending to move forward with its pit expansion. The company retains a high-grade inferred underground resource at its Stockwork and SB zones — totalling 5.2 million tonnes grading 11 grams gold for 1.8 million contained oz. — which is available for future development.

“The only way to really do it is to wait for that expansion at the SB zone and attack it directly from the bottom of the pit,” Atkinson explains, stating that the company can work on inferred resource programs from surface, but needs to wait until it can access the underground to graduate those resources to measured and indicated categories. “So an upswing of this is that it buys us time to work on the underground mineralization, and define a resource and economic parameters that really work,” he says.

With such a capital-intensive year at Kumtor, Centerra drew down US$74 million from a US$150-million revolving credit facility during the third quarter. Atkinson says the move was triggered by Kumtor’s temporary mill shutdown.

“We knew we’d be back into ore by September and start generating revenue in October. We also knew we had union negotiations coming up as well, so it was just the right thing to do to assure we had the liquidity. Our cash balance will be back up by the end of the year, and going forward it should be positive,” Atkinson points out. “Our employees, on a relative basis for the country, are well paid — we’re looking at nearly ten times the national average. We think that’s manageable, going forward. We don’t see big inflationary pressure coming out of the negotiations.”

Labour negotiations are one socio-political uncertainty for Centerra in the new year. Another involves an ongoing review of the company’s operations by the Kyrgyz government, after a Parliamentary challenge by an opposition party member brought into question Centerra’s right to operate.

Atkinson says the report has been delayed slightly, and he expects it to be delivered to Parliament by mid-November.“That’s the way it can be in these relatively young democracies,” Atkinson says. “They tend to be bit a more fractured politically as far as factions are concerned. The process or system in a place like Kyrgyzstan allows any Parliamentary member to request a commission, and they can put it together and investigate pretty much anything.”

Centerra rose 1.9%, or 20¢, following its third-quarter results. The company has traded within a 52-week range of $6.17 and $22.40, and closed at $11.01 at press time. Centerra has 236 million shares outstanding and maintains a $2.5-billion press-time market capitalization.

“I think most of the people who follow our stock understand the story, so I suspect a lot of that is behind us. The political issue is still out there, and again, people are aware of that — but it is an unknown,” Atkinson concludes.

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